Big Carolinas HealthCare System deal could be prelude to full-blown merger, lawmaker says

UNC Health Care and Carolinas HealthCare are proposing to create one of the nation’s biggest health care networks. Robert LahserObserver File Photo

UNC Health Care and Carolinas HealthCare are proposing to create one of the nation’s biggest health care networks. Robert LahserObserver File Photo

The partnership proposed last week between two of the state’s largest healthcare providers could be a prelude to a full-blown merger, says one state lawmaker.

UNC Health Care in Chapel Hill andCarolinas HealthCare System on Thursday announced a plan to create one of the largest hospital networks in the country, with some 90,000 employees and 50-plus hospitals. The executives of both organizations stressed that this was not a merger, taking care to call it a joint organization.

Under the proposal, each health system would keep its own board of directors, but would also answer to a new board that would oversee the joint company.

Republican state Sen. Jeff Tarte, a retired health care business consultant from Cornelius, said something bigger may be on the horizon.

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“Basically what I see is, they’re headed down the path to see whether they would fully merge their entities at some point,” Tarte said. “It’s very close to a merger. It’s sort of a trial balloon.”

Tarte said the creation of the combined health care company would require the legislature’s involvement, because the deal involves UNC, a state-owned asset, and has sweeping implications for North Carolina’s health care sector.

He predicted the combined organization would eventually be controlled by the much larger Carolinas HealthCare, which is the state’s biggest health care system with $9.8 billion in annual revenue, and noted that for UNC to control the new organization would create a “level of debt obligation the state has never seen.”

N.C. Sen. Jeff Tarte

“At some point we will have to decide whether we will let UNC Health Care lead as the state entity, absorb Carolinas HealthCare and take on additional obligations,” Tarte said. “You’re talking about the state absorbing 40 hospitals, including one of the largest facilities in the state of North Carolina.”

The nation’s health care market is in the midst of a hospital consolidation wave, with mergers coming under intense scrutiny by regulators for their potentially harmful effects on costs and services. Some health care companies, like Raleigh’s WakeMed Health & Hospitals and Durham’s Duke University Health System, have opted for limited collaborations in specific areas, like heart care and cancer care, in which they can steer patients to each others’ doctors and facilities.

“This particular partnership is a step beyond what we’ve seen recently,” said Republican Rep. Nelson Dollar of Wake County. “This is at a new level where they’re creating a separate overall board.”

Legislative support sought

The partnership could be reviewed by the Federal Trade Commission if it raises significant concerns, and could take at least a year to come to fruition. But support from the state legislature also is widely seen as essential to the joint company’s acceptance and lawmakers will be closely monitoring the partnership as it develops.

Bill Roper, CEO of UNC Health Care, notified key lawmakers about the deal in the days leading up to the public announcement.

“The legislature is of great interest to us,” Roper said Wednesday during an interview at The News & Observer. “We want to have their support and encouragement for this project.”

UNC spokesman Alan Wolf on Saturday emphasized the proposal is not a merger. “UNC Health Care will continue to exist as created by statute,” Wolf said. “While we will operate together, neither organization is going away and no assets are changing hands.”

Lawmakers are ultimately responsible for UNC Health Care. The state-owned 12-hospital system is under the UNC system’s board of governors, whose members are appointed by the legislature. Roper and Carolinas HealthCare CEO Gene Woods said the new joint company would turn UNC into an academic research powerhouse that will be able to recruit the best national talent, and compete for federal grants to fund prestigious research projects.

Dollar said any changes to UNC Health Care’s status as a state-owned entity would likely require legislative changes, but whether or not lawmakers could block the deal would require a legal analysis.

He noted that lawmakers have various options to express their will. While he declined to offer specifics, in the past two years, the UNC board of governors pushed out then-UNC president Tom Ross, and the Republican-led legislature defunded the UNC Center on Poverty and is now seeking to ban the UNC Center for Civil Rights from filing lawsuits.

Some lawmakers said in interviews last week that they are for the proposed partnership. They say they are encouraged by the promise made to increase health care options in the state’s rural regions, which are struggling economically and have a shortage of doctors and services.

“For long-term strength in an uncertain health care world, this is a good move,” said Sen. Tommy Tucker, a Union County Republican who previously co-chaired the Senate Health Care Committee. “They’re taking a very aggressive position to help the rural areas, which of course is fairly key to the health of the state.”

UNC Health Care and Carolinas HealthCare signed a letter of intent last week to begin discussions on how to combine operations, a process that will play out over the coming months. The two groups expect questions about their company’s effect on health care access and competition in the state, and say all concerns will be addressed so that the proposal can move forward.

Questions remain

For others, the proposal raised questions about the potential of a mega-sized hospital network to dominate the state’s health care market and steer patients away from competing hospitals and their medical practices.

“People are concerned about control and about monopolies,” said Republican Rep. Gregory Murphy, a urology surgeon from Greenville. “It would be the biggest health care system in the state and possibly a monopoly.”

Tarte, whose consulting work for hospitals specialized in strategic planning, and mergers and acquisitions, said understanding the nature of this business relationship may come down to figuring out which of the two partners will ultimately come out on top.

“I can tell you, in 95 percent of these deals, there is no equals,” Tarte said. “Someone ends up being the dominant player, and their executives tend to get the corporate positions.”

Tarte said the legislature is likely to assign this matter to at least one oversight committee to assess the partnership’s benefits and implications for the state, and to understand the legislature’s fiduciary responsibility and stewardship role.

“This has got to be one of the biggest health care quote ‘potential mergers’ – or headed that way – in the entire country in years,” Tarte said. “Especially to blend a $9-billion entity with a major medical center – that’s almost never done.”

The health care partners have not yet selected a name for their joint company, or the location of its headquarters.

Roper will chair the new board and Woods will be chief executive, but the executive management team has not been assembled. Each organization will continue to employ its own workforce, but the facilities will be re-branded under the banner of the joint company.

For now, lawmakers say they have lots of unanswered questions about the deal, mostly about its benefits for the residents of North Carolina, and about the rationale for undertaking such an ambitious venture.

“The verdict is still out whether this is going to be good or not for North Carolinians,” said Democratic Sen. Don Davis of Greenville, and a sociology instructor at Lenoir Community College. “Everybody who gets engaged don’t necessarily need to get married. And everybody who gets married don’t need to be married.”